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Interest Only Mortgages, What are the benefits?

This is a mortgage which you hear very little about. The first I heard of an interest only mortgage was over ten years ago. That was during them real estate boom market. One that was popular then was a very low interest rate, interest only mortgage with negative amortization. Wow! That’s a mouthful.

During the real estate boom, home values were rising like crazy, with no sign of ever stopping. Many people figured they would buy for the lowest borrowing cost that they could, and then sell the home a few years later and make a killing. So the mortgage companies came up with this. Interest rates in 2004 were about 6%. But banks would off a rate of maybe 1.99%. You would pay interest only. The difference in the cost of the interest between the going rate and the 1.99% would be added to the balance of the mortgage. The loans were usually for either five or seven years. If you took a five year balloon mortgage for $400,000 , paying interest only with the negative amortization, you would probably need to pay off $450,000 to $475,000. And if the plan went well, that was okay. People thought the house would then be worth $200,000 more than they purchased it for.

And then came the crash.

Then house was worth $50,000 to $100,000 less. And they didn’t have the cash to pay it off when the balloon payment became due. And they couldn’t refinance, because the house was worth a lot less than they owed.

Many people lost their homes and all of their savings, and this was a contributing cause to the real estate crash.

But these mortgages are no longer offered. But a straight interest only mortgage is offered. It may work for you if you think your income will have a significant rise a few years in the future. Or if you think you will only be in a home for a short while.